Burning the Corporate Commons

In 1964 GM was the largest and most profitable company in the world. If I remember correctly it was second only to Soviet State Enterprise, as the largest industrial concern, public or private, in the world.

However, if in 1964 you had invested in GM you would have lost money. That is the discounted present value of all dividends you received from GM stock would not have made up for the price of the stock. Of course those dividends stopped in 2008, never to return again. Any dividends from the New GM will go to a new set of owners.

Today it appears as if Microsoft is embarking on a similar pattern. Microsoft is the most profitable non-petroleum company in the world. Microsoft is paying out an annual dividend of approximately $4.5 Billion but is on track to lose nearly $3 Billion from its Online Services Division, that part of MS that competes with Google.

Those losses, however, are steadily growing.

It is conceivable that Microsoft will begin loosing more money in Online Services by 2012 than it is paying out to shareholders.

Moreover, Microsoft’s current dividend yield is 2.27%. 30-year inflation adjusted US Treasury bonds are selling at 1.9% meaning that if Microsoft is able to maintain its dividend and survive its war against Google, Apple, Facebook and whomever else happens to evolve over the next 30 years its shareholders will have beaten TIPS by 0.37%.

Moreover, given that TIPS routinely underperform regular Treasuries, Microsoft will have to survive and maintain the real dividend in order to break even with government securities. In discounted present value terms Microsoft has to stay alive and maintain the real dividend for investors not to lose money.

Now it is possible that Microsoft will thrive, raise the real dividend and deliver real gains to its shareholders. Yet, it is equally possible that Microsoft will lose in the new environment, go out of business or be forced to limit its dividend increases to less than the rate of inflation.

There is a simple way out of this: shutdown the Online Services Division, double or even triple the dividend and payout the current profits to shareholders.

What’s your guess on the probability that Microsoft will do this?

My sense is that this Burning of the Corporate Commons is a major source of loss in the US economy. In essence Microsoft is captured by its corporate bureaucracy, a group that is more interested in the continued existence of the company than in maximizing profits. The entire point of capitalism is creative destruction, that old firms die as new innovators come along. However, modern firms lock up much of their profits in a war chest designed to keep them from dying. This is pure economic loss. It’s bad for shareholders and its bad for America.

Karl, your logic is devastating and your spelling deplorable. I spontaneously resonate to the Soviet Bureaucracy-corporate oligarchy analogy meme. I think it is a fruitful line of thought. I can’t keep from mentally comparing current Wall Street bigwigs with the corrupt Central Committee apparatchiks of the Brezhnev era in the Soviet Union, trying desperately to plug the leaks in the putrefying substance of their hypocritical ideology. In the full knowledge, of course, that nobody believes their twaddle anymore anyway.

In a lyrical mood, I even penned a little poem on the subject:

AN ECONOMIST ’S FRIENDLY ADVICE TO A BUNCH OF CAPITALIST PIGS

Dear chums:
Get used to the idea that
Youre gonna hafta dream up
A new line of bullshit
´Cause after that last number you pulled
Ain’t nobody buyin’ the old one no mo’.

No one should have ever believed that vested interests within a corporate structure would collectively aggregate their personal preferences and generate a cumulative decision making outcome that would match the hypothetical preferences of the self-interested corporate actor they are a part of, much less the interests of the shareholders. It’s so improbable that it would be an extremely incredible thing if the world actually worked that way, yet many economists were surprised when it didn’t.

More on-post, you have considered the social cost of MSFT wasting shareholder’s money, but you have you considered the benefit of at least trying to compete against Google’s expanding monopoly? Maybe society is better off as a whole with the competition in this case. But generally I agree with your point.

One could of course reverse this logic saying they are only doing what they were put there to do and if investors don’t see their return it is just because they unwisely bid up prices to levels that could never be realized. Then again maybe it will reinvent itself like Apple and this will all be put off for decades, though that may be a longer shot.

spot on. The reason behind Microsoft’s behavior is that it has been acting as a predatory monopolist for almost 20 years.

For 15 years Microsoft succeeded: it could scare away, buy up cheap, marginalize or outright destroy prospective competitors like Netscape, Borland, Banyan, Corel, Novell and more.

Microsoft did what amounts a textbook description of what predatory monopolies do to maintain their monopolies and extend them to related markets: dump (sell cheap at a loss – and Microsoft can go even to negative prices because it could recoup its losses later on and some more), engage in various ‘scare’ tactics against competitors (Fear, Uncertainty and Doubt), exclusive contracts with PC makers that locked away those PC makers from competitors, amassing patents for everything trivial that moves and thus cutting off future innovation, and various technical methods to artificially increase the dependency on Windows: intentionally over-complicated APIs, secret document formats, DLL hell, etc.

Now Microsoft does the same with Google.

The difference is that it does not appear to be working, so Microsoft is putting in more resources – all at a loss. Right now the Windows and Office monopoly is subsidising this price dumping activity.

So yes, Microsoft is killing billions into Bing (which is barely at 2% market share and stagnating), billions into the 7th iteration of Windows Phone (at 5% market share and shrinking) – how many failed attempts would a real free market tolerate before declaring a company a loser?

Basically Microsoft is circumventing effective free markets by being a way too big (and inefficient) monopolist that meddles in markets it should not meddle in. We don’t really want the virus and malware-infested Windows world on our smart phones, do we?

In other words, size thresholds should not only be considered for big banks, but for big corporations like Microsoft as well. It helps no-one that a single huge actor is controlling vast areas of economic life.

Amen. I love the fact that the Wikipedia article on Bill Gates mentions that “his mother served on the board of directors for First Interstate BancSystem and the United Way” but fails to mention she was on the board of directors of IBM when that company entered into the sweetheart deal of the century with Bill, letting him buy DOS and license it to IBM for a hefty (and perpetual) profit.

I find it interesting that nobody has raised the obvious point – US companies don’t pay out much in dividends because they’re taxed at a higher rate than cap gains, on top of the corporate income tax. Shareholders up to a point therefore accept that the management will burn through some capital. As long as it does so at a rate of less than 20%, everyone wins (except other taxpayers). If you add that on top of the relative powerlessness of US shareholders to hold management to account even when they know their money is being wasted, its not surprising at all that companies are allowed to destroy capital like this.

Microsoft has been looking like a spent force for some time now: the last ten years or more have been characterized by a series of spectacular missteps (of which Vista was only one) and no real “gee whiz” innovations. A me-too music player, an also-ran phone platform, glitter-and-chrome “upgrades” to Office–a product that has not really improved in fifteen years(!)–and, with 2002’s .NET framework, the official abandonment of backwards compatibility, which used to be the state religion in Redmond. Perhaps the XBox deserves some real praise–I don’t know too much about that market–but, if so, it is conspicuous in its lonlieness.

Microsoft has been running on inertia since pretty much the turn of the century–extracting upgrade tribute from a staggeringly large installed base–but every year, the Danegeld starts to chafe just a bit more, and, hey, that Google Docs thing is actually pretty cool for web-based collaboration, and so forth.

They’ve got a LOT of inertia, and they throw a lot of money around, and–who knows?–they might yet pull a rabbit out of their hat. But does it look like the way to bet?

[…] to take the billions they made from Microsoft and give it to the Microsoft of tomorrow.And Karl Smith:My sense is that this Burning of the Corporate Commons is a major source of loss in the US economy. […]

[…] NEGATIVE returns he doesn’t specify whether the latter occurs in the private sector (though Karl Smith would not be surprised if it does for many publicly owned corporations whose shareholders would be […]